Do bulls or bears win in 2023?

The new year started off on a rollercoaster ride for investors. Some are excited… some lose their lunch. It's the past. The key is what all of this means for the future, especially as we edge closer to the all-important 200-day moving average for the S&P 500 (SPY). Find out what 40-year investing veteran Steve Reitmeister has to say about it in his new commentary, including a trading plan to stay ahead of the market.

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The first trading week of the new year ended on a high note. However, it wasn't all "lollipops and ice cream" as stocks fell one day, then surged the next...then sank...then surged again.

The reason for this extreme volatility is due to mixed signals on the economic front. Some quite bullish. Some quite bearish. This is all quite confusing.

So I'll do my best to make sense of it all in this week's commentary.

Market Commentary

The best place to start this conversation is to share with you the content of a trade alert this morning to take profits on a 3X inverse ETF in my Reitmeister Total Return service:

“Today we received a set of Goldilocks reports for the bulls. Strong employment + moderation in wage inflation + weak ISM report = higher chances of a less hawkish Fed and so the bulls will have fun for a little while...and therefore better to sell HIBS.

Reity, are you getting optimistic?

No. I'm becoming a little less bearish with today's information. And thus remove our most aggressive bearish bet from the table.

At the moment, investors are mostly focused on inflation and inflation is moderating nicely while employment remains strong. This improves the soft landing narrative.

Unfortunately, they distract from the collapsing economy, such as the ISM Services which fell from 56.5 last month to a contracting 49.6 this month. And yes, the forward-looking component of new orders is even worse at 45.2.

I think the S&P 500 (SPY) could try to get back to a 200-day moving average (3,999) and then re-evaluate if inflation is the only story worth noting...or if the deterioration in the economics should weigh in decision making???

If we really break the 200-day moving average significantly...then yes, we will be less and less bearish...and more and more bullish."

(Friday morning endnote)

There really is a "Catch 22" scenario in rooting for lower inflation. This is because the best way to reduce inflation is to reduce demand. Yes, that is the explicitly stated objective of the Fed with its rate hike regime.

But let me do a little translation for you:

"Lower Demand" is the Fed's word for "Let's create a recession"

So yes, we are taming inflation by significantly damaging the economy. This is showing loud and clear in this week's major economic reports, starting with Wednesday's ISM manufacturing index dropping ever lower to 48.4. This goes hand in hand with the display of 45.2 for new orders indicating even lower readings to come.

And like the already shared ISM services, much of the economy is also in decline. Let me correct that...in a state of falling off a cliff.

Yes, it's disinflationary. Hooray!

But it also opens Pandora's box known as a recession. Boo, Hiss!

And if it really picks up, employment will eventually falter, leading to lower spending, which will only exacerbate recessionary pressures.

So... is it time to be bullish, because lower inflation could make the Fed less hawkish going forward. Or is it time to turn more bearish because there are bigger signs of a recession forming???

This is indeed the key question for investors. But with the Fed likely mum until their next decision date on Feb. 1, then I might see the bulls having a bit more fun until serious resistance at 4,000.

This area is now double reinforced. Not only is this a significant psychological hurdle...it is also tied to the 200-day average which now sits at 3,999.

We have seen several momentary breaks above the 200-day moving average since the start of the bear market. And then quickly the coffin was closed with more inconvenience along the way.

To sum up, I'm still bearish because I think the catalyst for the recession is more important than lower inflation. However, other investors may disagree. So, if we see a significant break above the 200-day moving average, I would be bound to get a little more...